Jun
07
2013

The 10 common traps of segmenting customers – Part 2

Segmentation is a powerful technique, but it can be misunderstood and misused. Therefore it’s important to have a clear idea about what segmentation should be used for.

In The 10 common traps of segmenting customers – Part 1, I talked about the following traps:

  1. Segmentation is the action – not the objective
  2. Too big to handle
  3. The customer chimera
  4. The frozen state
  5. Problems with referencing

Read on to find out about more common traps that can occur when using segmentation:

6. Differentiation or just different coloured envelopes?
The best segmentation framework in the world will still not deliver a return if a business cannot conceive and execute worthwhile strategies. After all, what’s the point in having segments if the customer experience is hardly different across each one?

All too often organisations think the best use of segmentation is in creating different communications for different groups of people. Frankly, if that’s your only reason for segmentation, it’s not worth the expense. It creates minimal difference, and won’t justify the cost. At the end of the day segmentation can only pay for itself by delivering lower conversion costs, higher prices and improved margins.

True segmentation means different propositions for different customer groups, not just different coloured envelopes in their direct mail.

7. Poor resource allocation and ROI assessment
All too often organisations allocate resources by product or business function. Yet if you are serious about segmentation, you need to follow a scientific method to allocate resources and assess returns across different segments.

One challenge to this is, of course, the fact that segments are not stable. How can you allocate suitable resources if customers shift segments? The answer for many organisations is to only segment at the macro level, for example by geography, by sector, by consumer/B2B.

8. Segment bleed – this sector is not for you
Segmentation may look good on paper, but customers are forever breaking out of their segments. If someone from the ‘Young Fun’ segment takes a shine to a proposition developed for ‘Grey Professionals,’ you don’t want to turn their business down. Yet this can ultimately damage a brand, particularly in a mature market.

9. Segmentation isn’t monotheism
Some segmentation programmes take on a distinctly biblical form, with the philosophy that ‘there shall be no other segmentation, but the chosen one.’

Indeed, some segmentation initiatives make Mao’s Cultural Revolution look like liberal tree-hugging. A steering committee is set up, other approaches are outlawed and a segmentation ‘manifesto’ is created, complete with witty pen portraits of the segments. Zealous marketing staff rush from agency to agency clutching these little red books to their breasts. Any business case that supports this segmentation is signed off immediately, and a collective mania grips the whole business. Finally, someone points out that the emperor looks rather underdressed…

This approach is just plain wrong. Segmentation is not a tool, it’s a tool-set. Yet if all you’ve got in your hand is a hammer, everything looks like a nail.

Segmentation is most powerful when it addresses a specific problem. And as most businesses face many problems, segmentation must be multi-dimensional. Value, needs, behaviour, product, demographics, customer state, preference, credit – segmentation can take any number of approaches, making your organisation as flexible as possible to meet business challenges.

One hurdle to overcome is the senior executive’s preference for simpler, easy to understand concepts. Today’s marketer has to be able to explain and demonstrate the benefits of multi-dimensionality against seductively simpler segmentation.

10. Organising based on customer segmentation
To become truly customer focused, many businesses flirt with the notion of using segmentation to create an organisational model.

This may be a laudable idea, but it creates serious problems:

  • Segments have to be referenced and stable to achieve it, and costs begin to proliferate the more segments you have.
  • As revenue and cost-reporting are normally product-based, this then has to be engineered into a segment-based view.
  • Allocating resources and customers to segments means setting up complex business rules.

Very few large organisations have introduced truly customer segment-based organisational models. Yet there are many businesses with excellent track records in value management and customer commitment. The truth is that customer focus delivers success but you don’t have to organise around customer segments to be customer focused.

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